Tumblr Buyout: 10 Reasons Why Yahoo Must Make It a Big Success

NEWS ANALYSIS: Yahoo has plans to acquire Tumblr for $1.1 billion in cash, but whether that investment boosts revenue and earnings any time soon remains to be seen.

Yahoo and Tumblr were all the news on May 20, when the longtime Web giant announced that it plans to acquire the micro-blogging service for $1.1 billion.
What is perhaps most surprising is that the deal is nearly entirely in cash, meaning Tumblr investors won’t need to worry about Yahoo’s stock price fluctuating, reducing their net payoff. Even better for Tumblr, many of the company’s employees who were attracted to the company with stock options will be millionaires when the deal is finalized in the second half of this year.
For those on the outside looking in, including Web users, analysts and shareholders, there might be several questions worth asking. Does the Tumblr acquisition make sense for Yahoo? What happens if Tumblr changes too dramatically? Can Yahoo retain Tumblr employee and user loyalty? And what possible reasons did Yahoo have for making the move?
Here are some observations that might answer these and other questions regarding what this deal is all about.

1. It’s a very big deal

So, why is this deal so important? Simple: it’s a very, very big deal. Tumblr, which has hardly any revenue stream to speak of, is being bought out for $1.1 billion in cash. That means Yahoo CEO Marissa Mayer and its Board of Directors is convinced that it can turn Tumblr into a major money maker in a relatively brief period of time–certainly no more than the next three to five years. It will be interesting to see if Yahoo can recoup that huge investment.
2. This almost happened years agoHere’s an interesting tidbit from the Yahoo-Tumblr saga: Several years ago, when Tumblr was in its infancy, Yahoo reportedly held discussions to acquire the micro-blogging service for $50 million. Tumblr at that time said no. Smart move.
3. They’ll be separate companies
Yahoo made very clear in its press release about the acquisition that Tumblr will remain a completely separate entity and will not in any way be impacted by Yahoo’s management staff. That said, Tumblr’s executives will still need to report to Mayer on the company’s performance. So, while they might be separate companies, look for Mayer to set the strategic directions.
4. Mayer says it’s about advertising
In a conference call with investors and analysts on May 20, Mayer said the key reason she endorsed the deal was the prospect of more advertising revenue. She believes that Tumblr, which has more than 300 million active users, is a huge revenue opportunity for Yahoo, and one that she wants to capitalize on with her company’s existing ad services.